An extremist, not a fanatic

December 31, 2005

Which is better: to have been an 18-year-old in 1982, as I was, or an 18-year-old today? Polly Toynbee thinks the latter:

This is the golden age - so far. There has never been a better time to be alive in Britain than today, no generation more blessed, never such opportunity for so many. And things are getting better all the time, horizons widening, education spreading, everyone living longer, healthier, safer lives.

For me personally, though, I’m very glad I’m not an 18-year-old today.

If I were 18 today, I wouldn’t have gone to grammar school, I’d have been frustrated by an educational system that teaches to the test rather than encourages inquiry. And I’d be anticipating leaving university with £10,000 of debt.

Perhaps worst of all, grade inflation since the early 80s means I would not have been able to signal my ability to prospective employers. In my day, decent first degrees and a masters were sufficiently scarce to get me decent jobs. Not so today.

I suspect, then, that if I were 18 today, my personal chances of well-paid fulfilling work would be lower than they have been for the actual 18-year-old of 1982.

My taste is that this disadvantage is so big that it outweighs the huge benefits that 18-year-olds today have: the internet, mobile phone and iPods, and of course an extra 25 years of call options on future technological change*.

This is very much a personal thing – I’m the sort of person who would have lost out from the “education spreading” celebrated by Polly: the bright but socially awkward working-class boy. And I, more than most, benefited from the boom in the City in the mid-80s that today's 18-year-old cannot reasonably anticipate.

There is a wider issue here. On average, people are better off today than 20 years ago. But not everyone is average. Even great progress has its losers – and these are not necessarily either obvious or blameworthy for their fate.

* A caveat - one uncertainty here is the course of medical technology. It would be a bit of a bummer if they discovered the secret of immortality just after you died – or would it?

December 30, 2005

How much discrimination is there against women in the labour market? If you want hard facts, rather than propaganda, look at the Annual Survey of Hours and Earnings. This shows that, considering full-time workers only, women's hourly pay (excluding overtime) averages £11.67. That's 17.1% less than the £14.08 men get.However, men's average pay, more than women's, is inflated by the fact that a few people earn mega-money. Among corporate managers, the 90th percentile of men get £40.49 an hour, against £28.22 for the 90th percentile of women. If we look at median, rather than average pay, the gender gap narrows to 13%. Women get £9.84 against men's £11.31. And several things other than outright discrimination by employers can explain this, for example:1. Heterogenous work. The gender pay gap seems largest in those occupations where wage inequality is highest even among men alone. For example, in the "managers and senior officials" category, where the 90th-10th percentile raio among men is 4.3, women earn 20.8% less then men. But in the "customer service occupations" category where men's pay is more equal, women earn the same as men.2. Less experience. Experienced workers earn more. This might be because they've got more human capital. Or it might be because they've spent more time looking for the job that best matches their talents. This means that if women have taken time out to bring up children, they'll earn less than men. In this paper, Alan Manning shows that this can explain all the gender pay gap.3. Occupational sorting. Women sort themselves into occupations that tend to be lower paid - nurses rather than plumbers, teachers rather than stockbrokers. Curiously, in female-dominated occupations - secretarial or personal care - the male-female wage gap is either small or in favour of women.I'm not denying here that some women do face direct pay discrimination by employers; it's just that it's hard to say how widespread this is.Can I just raise two questions?First, let's grant the feminist argument, that gender stereotyping leads women into lower-paid work. How much of a problem is this, if women are happy in such work? And there's evidence that they are. or at least were. Years ago, when the gender pay gap was bigger than now, women reported greater job satisfaction than men. But as the gender pay gap has narrowed, with women competing against men, their happiness at work has fallen. You might say there's a parallel with the philosophical story of the "happy slave." If a slave has been indoctrinated to want little in life, she might be happy being a slave. But few of us think this legitimizes slavery. Rather, we complain about the indoctrination. So shouldn't we complain about women being indoctinated to want low-paid jobs?I'm not sure. The reason we complain about the happy slave being indoctrinated is that freedom is a valuable intrinsic good - maybe the intrinsic good. But I'm not sure high pay is such an intrinsic good, as it's often compensation for unattractive work. Indeed, we could turn the complaint about indoctrination around. Maybe it's men that are oppressed by it. We are socialized into wanting high paid jobs that offer little job satisfaction or meaningful human contact. Women, traditionally, are freer to choose fulfilling work.My second question is: how legitimate is the feminist ambition of equal opportunity for well-paid work? The biggest gender pay gaps are in high-paid work - among workers at the 90th percentile of earnings for a given occupation. This suggests that one form of discrimination is women's less access to "top jobs."But should socialists really champion women's right to get top jobs? Or shouldn't we instead oppose the very concept of "top jobs" as representing unacceptable (and, in the case of management, inefficient) inequalities of wealth and power? If all slaves had an equal chance of manumission, this would not legitimize slavery.

December 21, 2005

Perhaps there is scarcely a man who has once experienced the genuine delight of virtuous love, however great his intellectual pleasure may have been, that does not look back to the period as the sunny spot in his whole life...The superiority of intellectual to sensual pleasures consists rather in their filling up more time, in their having a a larger range, and in their being less liable to satiety, than in their being more real and essential...I have very frequently taken up a book and almost as frequently gone to sleep over it; but when I pass an evening with a gay party, or a pretty woman, I feel alive, and in spirits, and truly enjoy my existence.

December 20, 2005

Women are not the same as men. That's what I learned from this paper by Marie-Claire Villeval. She's found that men and women choose different ways of being paid.She asked subjects to solve maze-type puzzles, and offered them two ways of being paid for doing so - a piece rate, according to every maze they solved, or a tournament-rate, which paid a bigger rate only to the person who solved the most mazes.She found that most men choose the tournament, whereas most women chose the piece-rate. The upshot is that men got paid more than women.It's easy to see that this difference in preferences can spill out of the laboratory and into the labour market. If men have a greater preference for risky competition-based pay, they will disproportionately enter riskier occupations - management, politics the City - which on average offer higher pay. Maybe, then, gender pay differences really do reflect differences in preferences. And here's what surprised me. These differences in preferences are not related to differences in either risk appetite or one's opinion about one's ability. Ms Villeval found that men and women scored similarly on both measures. Differences in preferences for pay, then, seem to be genuine gender differences.Are these differences due to social norms, or to innate biological differences? That's an open question.

December 19, 2005

Schools should select pupils on the basis of parental income, not ability. That's the belief not only of John Prescott, but of Tony Blair (ed Fettes: fees £20,199 pa), and Ruth Kelly (ed Westminster, fees £23,046). The Times says:

Ms Kelly has insisted repeatedly that there is “no way” she will bring in more selection to schools. There is a national “admissions code”, which rules out selection on ability and which would stay in place under the new system.

But of course, New Labour permits selection by income, by tolerating both private schools and the fact that access to the best state schools depends in large part upon one's ability to afford houses in the catchment areas of such schools. Here's the summary of a paper (pdf) in the Economic Journal:

Family income plays a significant role in determining access to the best schools, including state schools. It does not matter whether good schools are provided 'free' out of taxes or through the private market in education. If you cannot afford the fees, you will not be able to afford the house that gets your kids access to the best state school either, since school quality is reflected in local house prices.

This seems to violate not one but two principles of equality. The obvious one is equality of opportunity. The less obvious is the principle of complex equality, which says goods should be distributed according to their social meaning - and money has no place in the social meaning of education. Michael Walzer wrote:

We can think of educational equality as a form of welfare provision, where all children, conceived as future citizens, have the same need to know...Their education cannot be allowed to hang on the social standing or the economic capacity of their parents...Private schools are expensive, and so parents are not equally capable of associating their children as they please. This inequality seems wrong, especially if the associations are thought to be beneficial; why should children be denied such benefits simply because of ther accident of their birth? (Spheres of Justice, p203,218)

All this raises the question: why does New Labour allocate education - even state education - according to parental income rather than ability? Why doesn't it want to give a good education to bright but poor kids? I can think of five reasons:1. It expects demand to fall for purely technocratic skills - the sort possessed by poor but clever people. Such jobs will be offshored to India. In the future, the skills employers will want will be "people skills" - abilities to communicate, to get on with people, to "fit in", to speak managerialist bullshit with a straight face. The stupid middle-class possess these qualities better than the bright poor. So let's invest scarce educational resources where they'll be most needed.2. Pure equality of opportunity is an unattractive ideal, as Michael Young famously pointed out in The Rise of the Meritocracy. It would encourage a ruthless individualism, and destroy any sense of social equality.3. New Labour is pandering to its core voters - the stupid middle-class, mainly public sector workers.4. A society in which the distribution of income is obviously unjust, because it merely reflects one's parental incomes rather than one's own efforts, would create a popular demand for redistributive taxation. Maybe this is what New Labour really wants, and it's playing a long game. 5. Paternalism. Giving poor but bright students an education is bad for them. it takes them out of their natural society and places them in an alien environment. Even if they jump through the hoops, pass all the exams and get well-paid jobs, they suffer isolation and loneliness. Why not protect them from this fate? Personally speaking - as someone from a poor single-parent family who passed the 11-plus - I think there's a lot to be said for argument 5.

December 15, 2005

The underlying premise of the freakonomics method is that human beings respond only to incentives and that their behaviour is consistent and can be modelled. This is the Robinson Crusoe conception of human behaviour that underpins all modern economic theory and applications. The prototypical economic agent is detached, rational, calculating, infinitely predictable and lives in a utopia of free choice and luxuriant autonomy. While there's difficulty in applying this abstraction to anyone in the real world, it's obvious this simpleton is 'male'. The adjectives associated with homo economicus are very firmly on the macho side of cultural coding.

I can see how she got this impression. Levitt and Dubner do seem to make an exaggerated claim for economics:

The typical economist believes the world has not yet invented a problem that he cannot fix [emphasis added] if given a free hand to design the proper incentive scheme (p20).

However, they go on to define incentives so widely as to threaten to make this claim almost tautological:

When it comes to crime, people also respond to moral incentives (they don’t want to do something they consider wrong.)

Not do I think sensible economists make the grand claims Emmy attributes to us about human nature. Economists might be stupid, but we’re not so stupid to believe all people are pure rational maximizers. Loads of motives other than economic ones affect our behaviour: habit, love, social pressures, religious beliefs, sheer stupidity, and so on.

Surely, economists’ claims are more modest. We say:

1. At the margin, some people respond to economic incentives. If you raise prices, some people buy less. Not all, just some. And not necessarily much less. And incentives might take years to work. There’s an element of homo economicus in people at the margin. That’s all.

2. Although people aren’t rational, they often behave as if they were. This was the point made by Milton Friedman in his Methodology of positive economics. Sure, he said, it’s unrealistic to assume people are rational. But this assumption yields predictions that do (roughly) accord with reality.

A good example comes from financial economics. The efficient market theory says that share prices embody all available information and so you cannot earn higher than average risk-adjusted returns by studying companies.

Now, this seems to rest on absurd assumptions – people aren’t so rational or knowledgeable as to process all information quickly.

But the prediction of this theory is borne out by reality. Most professional fund managers, over the long-run, do under-perform the market.

Perhaps if economists were more modest about what their discipline could do, and didn't make unnecessarily grandiose claims about human nature, we would get more respect from non-economists.

There’s one thing David Cameron said in this speech yesterday that is very misleading, and possibly outright wrong. It’s:

Our business investment is the lowest since records began.

If this means anything at all, it means as a share of GDP.

If we measure investment in current prices, he has a point. Investment accounted for 9.46% of GDP at market prices in Q2. Granted, it was lower in Q1, 2004Q4, 2005Q2 and 2003Q3. So he’s not strictly accurate*. But he's right insofar as investment has been lower recently than at any time since records began in 1965.

However, if we measure investment in constant prices, things are very different. Investment is now 10.2% of GDP. That’s well above the post-1966 average of 8.1%, and higher than we had seen before 1998. On this measure, business investment has been higher under New Labour than ever before.

Why the difference? Simple. Investment goods prices have been falling, because computer prices have fallen. This means the value of investment is low, but the volume high.

This is surely something to celebrate, not condemn. In giving the impression that there is a serious problem with capital spending, Cameron was therefore being very misleading.

Of course, one could argue that businesses aren’t investing enough – that they’re being shackled by regulation or are being too pessimistic about the future. But that’s a different story.

* My figures come from here. I’m using code NPEK for business investment at current prices, NPEK for investment at constant 2002 prices, YBHA for GDP at market prices, and ABMI for GDP at 2002 prices.

Another thing: Cameron has begun to start his speeches with jokes. Yesterday’s speech began:

Six hundred and ninety Wednesdays ago…

This is a bathetic reference to Lincoln's Gettysburg address and Martin Luther King’s “I have a dream” speech. This follows his speech on Monday, which began with a perfect oxymoron:

December 14, 2005

Modern Conservatives look to Texas, not Islington, for inspiration. If anyone wants to see what a Conservative government would bring to Britain, they should look to the US.

So what could we learn from Texas?How about their 10% law, which guarantees a university place to the top 10% of students at any school?This is wonderfully egalitarian. It reduces the disadvantage students suffer if - through not fault of their own - they attend crap schools. Contrast this with the scandalous situation in the UK, where state schools blight the life-chances of brighter students.So, why didn't Miliband and Alexander discuss this plan?Here's my theory: they wanted to pander to the racist prejudices of Groan readers - that Texans are right-wing nutters whilst Islingtonians are caring and compassionate.Texas's 10% law proves the opposite. it shows that Texas is more committed to genuine equality of opportunity than most Islingtonians, who seem content to ensure that the state perpetuates vicious inequalities.Another thing: what proportion of the residents of Islington are worthy to even kiss the feet of Texans Terry Allen or Guy Clark or the late Townes van Zandt? (I leave out Steve Earle, as I reckon he's over-rated.)

The dead trees say that today's figures (pdf), showing a fall in wage inflation, increase the chances of a cut in interest rates. But there's something more interesting going on.Just ask: why should wage growth be so low when unemployment is low? It's not merely because of lower City bonuses. If we ignore bonuses, wages in the private sector have grown a mere 3.7% in the last 12 months (3.8% in the public sector.) That's a real increase of just 1.3%, based on RPI.There's a simple reason for low wage growth - productivity is growing slowly. I reckon output per worker has risen just 0.7% in the last year.This is not merely because employment has expanded in the low-productivity public sector. Productivity is also stagnating in the private sector. Here are the figures for the last year, with five-year annualized growth in brackets*:Construction: -1.4% (1%)Distribution, hotels & catering: 0% (2.1%)Transport & communication: 1.4% (1.9%)Business services: 1.4% (1.3%)Manufacturing: 3.9% (3.8%)With productivity growth so low, you'd expect wage growth to be low.In all cases, except manufacturing, productivity growth was higher in the mid-90s. This is, of course, in contrast to the US, where productivity growth boomed in the late 90s, and is still doing so.So, what's going on here? It's not that UK investment has been lower than the US's. Between 1995 and 2004, UK business investment rose at much the same rate as the US's; US investment has since risen faster than the UK's but the increase is too recent to explain the productivity difference .Possible reasons include, among other things: less competitive pressures to force efficiency higher; poorer management; building regulations that stop retailers exploiting "big-box" efficiencies as US retailers have done; greater employment protection; or less skilled workers. For more on the international comparisons of productivity, try this paper by Mary O'Mahoney and colleagues, or this pdf by Robert Gordon.* All these figures are based on comparing table 5 of the labour market figures with table B1 here (pdf).

December 13, 2005

Two stories:1. Blair "wants to lower from £5,000 to £1,000 the minimum amount of money or assets police can seize from criminals - even if they have not been convicted." (via Talk Politics).2. Police have investigated an innocent woman for making homophobic remarks, even though no-one alleged she had committed any crimes. (via Natalie Solent.)The link between the two is that both undermine the rule of law - the principles that people should be punished only after being found guilty of a crime, and that the police should investigate alleged crimes, and not harrass people for expressing an opinion.But why is the rule of law under attack? At risk of sounding monomaniac, I blame managerialism. Put it this way. In many walks of life, not just economic policy-making, there is a choice between using rules and using discretion*. The choice often depends upon how much confidence you have in your ability to think rationally. If you think rationally is unbounded, you'll want to make ad hoc decisions, and use your discretion. If, though, you believe, with Herbert Simon, that rationality is limited, you'll not trust discretion, and will prefer simple rules.It's no coincidence, therefore, that one of the staunchest defenders of the rule of law - Friedrich Hayek - was also one of the strongest advocates of the notion of limited rationality and knowledge. Central authorities, he believed, simply do not have the requisite knowledge to make good ad hoc interventions into social life and the economy. The best the state could do, therefore, was set and uphold rules of law. Blair, however, seems to reject the premise of bounded rationality and limited knowledge. He therefore thinks the state needn't be constrained by the rule of law, as it can do better by ad hoc interventions.But it's not just Blair who's guilty here. He's merely acting in accordance with his nature. What I find more obnoxious is the Stupid party's apparent silence.I remember Thatcher and her minions screaming about the need for the rule of law in the late 70s and early 80s, when trades unions, she thought, were running amok. Why, when it believed so much in the rule of law 20-30 years ago, does the Stupid party's commitment seem weaker now?Could it be that its support for the rule of law, like its alleged belief in free markets, was merely a stick with which to attack the working class? * Two examples should suffice. Old football coaches say: "if in doubt, put it out" - meaning don't waste time thinking what to do. If, like Rio Ferdinand, you have limitless confidence in your ability, you'll ignore this rule. And an old currency trader I used to know would say "never buy a pound you have not already sold" - which was a great rule from 1971-96.